Google’s announcement that it is launching a new operating system, entitled Google Chrome, is seen by many as a gauntlet thrown down to Microsoft. Somewhere deep in Google HQ, a few executives probably believe that the company’s new cloud-based OS is the beginning of the end for Windows. And in the halls of power in Redmond, executives may be girding for a desktop battle. They’re wrong. Google’s Chrome OS has the potential to save Microsoft, Intel, and the rest of the notebook industry from falling margins by creating a meaningful distinction between notebooks and netbooks. Let’s journey back in time to October 2007, when the first commercial netbook, the ASUS Eee PC 701, hit store shelves. The Eee PC 701 had a paltry 7-inch 800×400 screen, a 4GB flash chip for storage, an underpowered Celeron processor, a tiny keyboard, and short battery life. Its small form factor and simple custom Xandros UI made it look more like a toy than a notebook, but a lot of people loved it. Consumers were excited because it was inexpensive and easy to carry. Notebook vendors were stoked because they saw an opportunity to sell a new class of companion device in addition to traditional notebooks and desktops. Then things changed. The original netbook vision was of a Linux-based companion device that was extremely inexpensive and let you perform mainly Web-based tasks. It was meant to be like a smart phone, but with a bigger screen and keyboard. The buzzword “$100 laptop” was bandied about, with the hope that someday the netbook would achieve price parity with an iPod. However, as the months went by, more and more users looked at the Eee PC and wanted more functionality. They demanded larger screens and keyboards, longer battery life, more storage, and the ability to run their favorite programs. Vendors wanted to meet these needs and grab a share of the new netbook market so they started coming out with 9-, 10-, and recently even 12-inch models. Intel knew that its rusty old Celeron chip wasn’t right for this new market and it saw VIA CPUs emerging in early netbooks like the HP Mini-Note, so it introduced Atom. And Microsoft saw that Vista would not run well on netbooks so it lowered the price and extended the life of Windows XP just for netbook-makers. Even while netbook makers added the above features and more, prices remained in the $299 to $399 range, and carriers even started to subsidize these machines for $199–and now 99 cents. As the netbook revolution was getting underway, several landmark ultraportable notebooks hit the marketplace. The MacBook Air, Lenovo X300, and Voodoo Envy 133 all hit store shelves with prices north of or close to $2,000. Consumers looked at many of these traditional notebooks, particularly the underpowered first-gen Air and the underwhelming Envy and said “why should I pay thousands more for this than I pay for a 10-inch netbook?” Unfortunately for Intel, Microsoft, and the notebook vendors, they did too good a job of making netbooks more powerful. Users realized that what they were looking for all along were lighter, cheaper, longer-lasting notebooks and that a single core Atom processor and Windows XP were good enough for most of the everyday tasks they wanted to perform. Now, “cannibalization” is the big concern, with many consumers buying $400 netbooks in lieu of mainstream notebooks. And, partly because of netbooks and partly because of the economy, the cost of regular notebooks has continued to plummet. The industry desperately wants to restore the distinction between netbooks and notebooks so consumers will have an incentive to buy higher-priced systems with faster processors and more expensive versions of Windows. Microsoft has tried to set a screen size limit of 10-inches for OEMs to install its lower cost Windows XP and Windows 7 Starter Edition licenses on their systems. And Intel is reportedly trying to prevent manufacturers from using its popular Atom N270 and N280 processors on anything larger than 10 inches, steering them instead toward its pricier consumer ultra-low voltage (CULV) chips. Yet these efforts are doing little to stem the popularity of low cost systems with screens ranging from 10 to 12 inches. Enter Google’s Chrome OS, which has the ambition of replacing Windows on all PCs, but is most likely to appear on netbooks. We don’t know how much Chrome will cost, but let’s assume for a second that it will be either free or incredibly inexpensive. Unlike Windows, it’s going to be designed almost exclusively for cloud-computing. Also unlike Windows, it will run on both traditional PCs and a new generation of “smartbooks” that use inexpensive ARM processors. Because of Google’s clout, it has a decent chance to succeed where other Linuxes — we’re looking at you, Xandros, Ubuntu, Linpus, and Moblin– have failed. If Chrome OS succeeds, it could lead to mass adoption of sub-$200 smartbooks. While Google could very well take market share away from Microsoft (and from Intel if the CPUs are ARM-based), it also draws a bright line between notebooks and netbooks. Today’s Atom-based Windows XP machines would be considered bargain notebooks, not netbooks. And with a clear focus on providing the full computing experience, vendors can push performance and bottom-line enhancing features like multi-core processors, larger screens, speedy SSDs, gobs of RAM, and powerful operating systems such as Windows 7 Home Premium. Microsoft and Intel won’t cede the companion device space to Google easily, but losing in the low-cost war could help them win more high-margin customers–and save their very hides from the perils of cannibalization.